TV broadcasters look for a happy medium to keep sports fans engaged

Senior producer Sherali Najak, left, and director Paul Hemming work in the broadcast truck during the airing of the CBC's Hockey Night in Canada, produced by Rogers Media, in a Dec. 6, 2014 file photo.

Millennials are watching television like no other age group since the dawn of the tube – they're doing it any time, anywhere. But while those unpredictable viewing habits create headaches for prime-time programmers and people selling advertising time, a recent study suggests millennials won't disrupt sports programming to the same extent. And that would be a relief to networks that have paid billions for broadcast rights.

That doesn't mean rights-holders are in the clear for their profligate spending. Broadcast media insiders broadly agree that multiplatform viewing demands a new structure for such rights contracts, with a greater emphasis on mobile and digital platforms as opposed to conventional television. Networks need other revenue streams to make up for lower conventional TV ratings for almost all sports, declining cable subscriptions and, especially, rising rights fees for sports properties.

Trouble is, no one has figured out how to generate those replacement revenues. As a result, both Rogers Media and Bell Media, which own Sportsnet and TSN, respectively, noted in their most recent annual reports that increased rights fees were the most significant factor limiting the networks' earnings.

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The millennial effect is supposed to be the undoing of TV's business model. There were those ominous stories about how declining subscriptions, cord-cutting and high costs at ESPN, the U.S. cable-sports behemoth, had been a drag on its parent company, Walt Disney Co. And there's still a fear that pick-and-pay and unbundling will slash subscription numbers for Canadian sports networks, too.

There is also the matter of the billions of dollars at stake. Skeptics have doubted the network axiom – that live sports events attract a demographic that sponsors crave, 18- to 55-year-old men who prefer to tune in live, on whatever platform they use, in real time.

Media analysts are divided on whether broadcasters have overpaid for the rights deals. But none of them sees any imminent decline in revenue for the leagues, thanks to one factor: Sports provide programming that viewers – even millennials – are willing to consume live, rather than recording it for later.

"Think for a minute what happened with the Toronto Blue Jays," says Gord Hendren, founder of Charlton Strategic Research Inc., referring to the baseball team's run to the American League Championship Series last fall. "Those ratings went through the roof and they captured millennials. They might watch it on the Internet, they might watch it on their phone, they might consume it on social media. But if the content is compelling – and the Blue Jays are a great example – the millennials are there."

Hendren's conclusion came as the result of a survey his market research firm conducted last September. In a survey of 500 sports fans aged 12 to 70 across Canada, the largest group of those who described themselves as "big fans" of the Blue Jays – 54 per cent – were millennials and younger.

Many of these fans would have little to no memory of the Blue Jays' World Series runs in 1992 and 1993, so it is an encouraging sign for both broadcasters and sports teams – laggards, such as the Edmonton Oilers and Toronto Maple Leafs, can count on their fans being there when they finally get back into contention.

But that is small consolation for Rogers, which has to find a way to break even on its 12-year, $5.2-billion deal with the NHL for the Canadian broadcast rights. The bad news is that, since the Leafs have the largest fan base of the seven Canadian NHL teams, their plummeting TV ratings over the past two seasons have caused much pain for Rogers. Worse still, going into what ought to be a postseason ratings and advertising-revenue bonanza, the media company is facing the prospect of a playoff season without a single Canadian franchise. That is devastating to its budget projections and reportedly is already having an effect on staffing levels.

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Kaan Yigit, president of Solutions Research Group in Toronto, says the NHL has gained consumers who have started to follow the league on digital and social media in recent years. But the communications and technology consultant adds that the gains did not offset the losses of conventional TV viewers. By December of 2015, an SRG survey of 500 Canadians showed, the number of Canadians aged 12 and above who consume the NHL on digital and social media increased 9 per cent, but in the same period, the number watching on television dropped 22 per cent. Over all, there was an 11-per-cent decline in Canadians who watch the NHL on any platform.

But the NHL remains the No. 1 sport to watch among Canadians; the SRG survey showed 50 per cent of the respondents said they follow the league on at least one device. Major League Baseball was second, with 36 per cent.

As for millennials, an SRG survey in December, 2014, found 33 per cent watch hockey online, on mobile devices or on social media; 31 per cent still watch games on TV.

The NHL broadcast contract is structured so that Rogers paid the smallest annual amount in 2014-15, the first season of the deal. The payments will rise each year over the next 11 seasons. Hendren thinks Rogers has a chance to turn a profit on the deal for two reasons. First, he says, "two-thirds of [Canadians] still watch conventional television," which means there will still be sizable TV audiences to sell to advertisers. The other is that millennials are still willing to watch games in the conventional way if they have a good reason, such as their teams' playoff runs.

Jays audiences on Sportsnet, for instance, went from an average of 600,000 per regular-season game in July to 1.61 million during the September stretch drive. The playoffs saw the numbers jump to at least three million with the deciding game in the American League Championship Series, which Toronto lost to the Kansas City Royals, pulling in 5.13 million viewers, a record for Sportsnet.

Hendren thinks the same dynamic will benefit Rogers if Canadian NHL teams become more competitive. "If you get the content right, the potential for sports is big," he says, adding: "If the Leafs get contending again, they would exceed all numbers."

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A more cautious opinion comes from Mario Mota, co-founder of Boon Dog Professional Services Inc., a research and consulting company in Ottawa. He thinks the numbers of cord-cutters (those who drop their cable or satellite TV subscriptions) and cord-nevers (millennials who don't subscribe once they live on their own) will continue to grow because, critics say, the telecom companies are passing on the rising costs of sports rights to consumers' monthly bills.

"If the costs of sports packages continue to rise the way they have been, at some point there is a limit for people, even sports fans," Mota says.

He does not see the solution in the recent arrival of skinny bundles, which the Canadian Radio-television and Telecommunications Commission forced on the cable companies. The problem is that the most popular sports networks, Sportsnet and TSN, are not part of the new stripped-down packages, which cost about $25 a month plus the cost of renting a cable box. The total cost of a package that includes both Sportsnet and TSN is more than $70 per month.

"If you're paying more every year [in rights fees] and it's increasingly a challenge to earn more and more advertising revenue, and there are people cutting the cord and cord-shaving, meaning your subscriber numbers are going down, it doesn't take a rocket scientist to say that's going to be a challenging environment for any sports broadcaster," Mota says.

Between 2010 and 2014, according to the most recent figures published by the CRTC, Sportsnet lost about 840,000 subscribers, a decline of 9 per cent to 8.3 million. TSN's decline was much smaller, about 1 per cent over the same period to nine million. But the CRTC has not yet published the 2015 numbers, which may show an increase for Sportsnet because it included its first season with the NHL rights.

Despite the loss of subscribers, TSN and Sportsnet saw a sharp increase in revenue between 2010 and 2014 because both networks negotiated an increase in the fees they receive from cable operators that carry them. There was also increased revenue from existing subscribers, because both networks added new pay channels. TSN's revenue climbed to $452.2-million in 2014 from $267.6-million in 2010 (before the loss of NHL national rights to Rogers kicked in). Sportsnet pulled in $311.9-million in 2014, up from $216.9-million in 2010.

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Despite this, both Rogers and Bell said in their last annual reports that the rising costs of sports rights deals held down profit. The companies attributed the hundreds of layoffs at Bell Media and Rogers Media in the past several months to the decline in revenue due caused by cord-cutting.

Are the broadcasters complaints about rights fees a signal of so-called peak TV? Or will rights-holders figure out how to sell digital ads and subscriptions to generate new revenue?

Mota says that, while Bell and Rogers complain about soaring fees, they are unlikely to stop bidding up the prices. "In Canada, you have healthy competition between Bell and Rogers for rights. You can bet when any kind of rights come up for renewal, they'll be tripping over themselves to outbid each other.

"There's kind of an irrationality in the market because of this environment. Plus, they need content. TSN has now expanded to five feeds, Sportsnet has four or five, and they've got to fill that air time.

"The question becomes: As publicly-traded companies, how long can they keep going, making deals like that and not making the returns their shareholders require and demand, before saying there has to be a better way to do this?"

A traditional broadcast deal calls for the network to pay a sports league an annual fee. Then, it turns a profit by selling advertising on television and adding subscribers to its cable channels. Hendren and Mota say that future broadcast deals will be driven by subscription revenue more than ad revenue. The companies will concentrate more on selling wireless and digital subscriptions for mobile devices and streaming packages.

Bill Kunz, a veteran U.S. network television producer and an associate professor of Interdisciplinary Arts and Sciences at the University of Washington, studies broadcast issues. He thinks there will be a shift to a subscription-based approach.

"They talk so much about cord-cutting, but the one thing that limits that is live sports," Kunz says. "What's keeping some of these services, cable and satellite [in the U.S.], afloat is live content. But, yes, the delivery model is likely to change. [The broadcasters] will figure out a different way to monetize it. But I don't know that the amount will be radically different."

While networks have so far failed to fully monetize digital and mobile platforms, Kunz says the U.S. national broadcast contracts with the NFL, NBA, MLB and NHL all have at least five more years to run, "so there is time enough to figure it out."

Mota, though, thinks Rogers is facing significant risk because of this, as its contract with the NHL does not expire until 2026. "In an environment where television is changing so rapidly, who can predict in 12 years what the world is going to look like?"

But Hendren believes the saving grace for Rogers will be the fact that, unlike most of the U.S. networks' deals, it has locked up all media rights, including television, radio, mobile and digital. So if the monetization progresses, the money will flow to Rogers.

Analysts are dubious of the peak-sports theory.

"Is it the end of media companies paying billions? I don't think it is the end," Hendren says. "I think it has big value for them. No. 1, it's content that's driven across their multiple platforms. No. 2, in terms of creating loyalty, [sports] is a reason to be a subscriber of a particular service if you have particular features or particular content you can push. That leads to subscription revenue in a world we're moving to, which is pick and pay."

What's happening in the United States now suggests Rogers' move to tie up all NHL rights may be the right one. Yahoo – rather than the NHL's U.S. television partner, NBC – recently signed a deal with the league to live-stream four games a week for free, along with highlights and other content (the games will not be seen in Canada thanks to the Rogers contract).

Yahoo Inc. is making strong moves to woo mobile-watching millennials, as the company already has streaming deals with the NFL, MLB and the PGA. And social-media giant Facebook is live-streaming professional boxing.

Rogers is promising to do much the same here. "It's our job, though," Rogers chief executive officer Guy Laurence noted in an interview with The Globe and Mail in May of 2015, "to deliver content in a format that the public [wants], and then work out how to monetize it, not force the public to watch content in a particular way because that's how we've monetized it in the past."

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